Self-employed borrowers bring a unique challenge to mortgage lenders. They don’t have consistent income confirmed by a third party. Instead, they have income that they claim themselves. Even if the money is legitimate, lenders have to go above and beyond to ensure that you can afford the mortgage beyond a reasonable doubt.

The days of stating your income are gone. Instead, you have to prove your income with proven methods. If you are unable to prove your income, even if it’s valid, you won’t be able to qualify for a mortgage.

So just what do mortgage lenders look for in a self-employed borrower? Keep reading to find out.

Verifiable Tax Returns

A majority of the time, you need to provide your tax returns to verify your self-employed income. Even if you pay yourself with a W-2s, lenders need to see what you claim on your taxes. The adjusted gross income on your tax returns is what lenders will usually use for self-employed borrowers. This is because it takes into consideration any expenses you write off due to owning a business. This comes off your bottom line and lenders can only use the income you claim on your taxes.

In some cases, not all, you may also have to provide your business tax returns. This is necessary when a lender can’t differentiate between your individual income and your business income. It’s also the case if your business is a corporation. It’s best to keep the two completely separate to avoid the complexity that can occur when you apply for a mortgage.

Consistent Income

One thing all lenders want to see out of self-employed borrowers is consistent income. In other words, they want to see you making around the same amount of money each month, or more. They don’t want to see declining income.

It’s understandable to have income that fluctuates throughout the year, but on a year-to-year basis, your income should be fairly stable. If there are great discrepancies in the income from year-to-year, expect a lender to ask questions. They will want to know what happened and if you have overcome the issue.

A Flourishing Industry

Expect lenders to look into the industry that your business operates in to make sure it’s in good condition. If you are in an industry that just doesn’t have the backing or a lot of businesses are falling out of, it could be a red flag for the lender.

You want to show that you are in a business that has a solid future. In other words, you want a business that has financial stability and that has high consumer demand. If it’s a business, no one has heard of and the demand is low, it may not fare as well in the eyes of the lender.

The Length of Self-Employment

Finally, lenders want to see borrowers that have been self-employed for a while. Typically, 2 years is the cutoff, but some lenders do cut some slack in this area. We don’t recommend applying for a mortgage 3-6 months after opening a business, but after one solid year, it may be a possibility.

In order for lenders to consider self-employment that has lasted less than 2 years, they want proof that you know the industry well. In other words, that you worked in the industry in the past. If you open a business that coincides with the employment you had before it, chances are that you have the knowledge necessary to succeed. If instead, you go into a completely different business where you don’t have a history or proof of education, you may have more trouble getting a loan.

Lenders don’t automatically shut down borrowers that are self-employed. You just need to be able to provide the lender with proof that you are a good risk. If the risk of default is high, a lender may not consider your application. It’s a good idea to have compensating factors to make up for your self-employment. This could include plenty of assets on hand, a low debt ratio, and a high down payment.

Buying a fixer-upper home may seem like a great idea, especially when you can get a great deal on it. Sometimes it is just as perfect as it seems, but there are certain things you should consider before you jump into this type of purchase.

Don’t focus only on the low price you get for the home. You have to look at the big picture. If you don’t, you could find yourself buying a money pit that could leave you with buyer’s remorse.

Look at the Neighborhood

When you buy a home, whether it’s a fixer-upper or not, you buy into a neighborhood. You should know what that neighborhood is like before you settle on purchasing a home. Will the neighborhood support the home you are about to create? This is especially important if you are going to do a complete teardown or completely change the face of the home. Will the home look like it fits in or will it stick out like a sore thumb?

If the home will stick out, you may have to worry about its value. If the homes around the home you buy won’t support the value, you won’t be able to sell the home for the amount you may have hoped. Do your research on the neighborhood and even see if anyone else has bought a home in the area and fixed it up. If they did, ask what type of return they received on their investment to see if it’s worth it for you.

Get an Inspection

You’ll want to know long before you get far into the underwriting process the condition of the home. Even if everything looks okay to the naked eye, there could be major issues that you are missing. The inspector will find those major issues for you and let you know about them. You can then decide if this is the right purchase for you. If you are financing the home, it’s important to have an inspection contingency on the contract so that you have the right to back out of the purchase if you can.

Once you have the inspection report, you can decide if this home is something you want to undertake. Are the issues worse than you anticipated? Will the home even pass an appraisal if you plan to finance the home? Can you afford the necessary repairs, let alone the cosmetic changes you wanted to make?

Beware of Major Issues

Your inspector should look for things like asbestos and lead paint. If either of these issues are prevalent, you will not be able to secure financing unless the issues are fixed. This leaves you with the option to pay cash for the home or apply for the FHA 203K loan, which provides funds to fix up a home as well as buy it.

Asbestos and lead paint issues are nothing to mess around with on your own, though. You will need professionals that can properly remove the issue for you. This could be not only a financial issue but also a health issue. You won’t be able to live in the home or even be near it until the issue is resolved.

Pay Close Attention to the Layout

There’s not much you can do about the layout of a home no matter how much you renovate it. Pay close attention to it as you look at the home – is it a layout that people usually like in that area? For example, do many of the homes in the area have an open layout? If so, and this home has a closed layout, it may not sell as fast as you would like. Know your audience and what people in the area like before you commit to buying a home, especially if you plan to renovate it and flip it as quickly as possible.

Know the Integrity of the Structure

One area you don’t want to avoid is the home’s structure. How is the foundation? Are the floors straight? Do the walls have cracks? These large issues could cause problems with financing the home as well as be costly to fix. Do you want to take on a job that big or were you just looking for a home that you could make cosmetic renovations on and flip it?

You’ll Need a Contingency Budget

No matter how good or bad the shape of a home is when you buy it, you’ll need a contingency budget. We recommend giving at least a 20% cushion to your renovation budget. This way you’ll know if something unforeseen occurs, especially when contractors knock down walls or mess with electrical or plumbing issues, that you’ll have the funds to fix the issue.

Buying a fixer-upper either to live in yourself or flip and sell for a profit can be exciting. Just make sure you take your time and decide if the project is right for you. The more research you do, the better your chances of buying a fixer-upper that gives you a decent return on your investment.

A home equity loan has many uses. It is up to the homeowner to decide just what to do with the money. The portion of your home that you “own” is called the equity. You can figure it out based on the current value of your home and the outstanding principal balance of your mortgage. The difference between the two is your equity. Because that money is not liquid; it remains in your home, you need to take out a home equity mortgage in order to tap into the equity. But just how can you use it? There are many different ways.

Emergency Fund

Many people take out a home equity line of credit, which is a form of a home equity loan. This line of credit is like a bank account into your home equity. You have to qualify for the mortgage based on your credit, income, debt ratio, assets and the value of your home. Once the lender approves you and you close on the loan, the lender provides you with access to the funds, which are usually up to 80% or so of the full
value of your home. Most lenders provide a checking account with checks or a debit card that you can use to access the funds.

If you take out the line of credit strictly to have an emergency fund, you can let the funds sit there untouched. You do not make any payments on the money unless you withdraw it. If you take money out with a check or the debit card, you then pay interest on those funds. Typically, this lasts for the first ten years of the loan, called the draw period. Once the draw period is over, you no longer have access to the funds and you must then pay the principal plus the interest back to the lender. It is nice to have that emergency fund available should something unexpected come up with your home or even your personal life.

Eliminate Debts

If you have
large amounts of debt hanging over your head and you do not like paying multiple creditors every month, you can use the home equity loan to consolidate the debts. In this case, the lender will not give you access to the funds, but rather pay off your other creditors. You decide with the lender how much of your debt you can afford to include in the home equity mortgage. This will play a factor in your ability to obtain approval as well since it affects your debt ratio. Obviously, the more debts you pay off, the lower your debt ratio becomes, but you also have to figure in the new mortgage payment to determine if your debt ratio fits the mold.

If you end up paying off all of your monthly debts, you just make the one payment to your new home equity lender. The remaining debts get paid off at the closing with the proceeds of the loan. If you are financially responsible, you will keep those revolving debts at a zero balance and focus on paying down the home equity mortgage to fully get out of debt.

Make Changes to your Home

Perhaps the most common use for a home equity loan is to make home improvements. This could mean many things – you could make necessary repairs, such as replacing a roof or an HVAC system; you could make cosmetic changes that you desire or make major renovations including room additions. The changes you make obviously depend on the amount of equity you have in the home and how much you qualify to receive. Because repairs and or renovations to a home can greatly increase its value, this is often considered the most valuable use of a home equity mortgage as it gives you a return on your investment.

Pay for College

Student loans are expensive and there is no way around it! If you have
equity in your home, though, you can tap into that money to pay the costly tuition and room and board. Sometimes it makes more sense for borrowers to tap into the equity of their home than take out the costly student loans. If your household makes too much money to receive any type of financial support from the government, this is usually the best option. Because you get a tax write-off for a portion of the interest you pay on the home equity loan, it can be beneficial for you to go this route rather than taking out traditional student loans.

Starting a New Business

Starting any type of business can be rather costly, making it difficult to get ahead. A home equity loan can help you gain the capital you need to start the process, though. The good news is that with a business, you usually make the money back faster than you would with any other method. This means that you could get the home equity loan paid off faster than you would if you took the money out for another reason, such as debt consolidation or home improvements. As your business takes off, you can have the capital you need to keep going while still paying your mortgage down or off.

How you use a home equity loan is really a personal choice. Most lenders do not question how you will use it unless there are special circumstances to your loan. If you have a good reason, though, such as consolidating debt, it could help you qualify for the loan, especially if you have a high debt ratio. In general, though, you can take out the home equity mortgage in the form of a line of credit and use the funds as you see fit.

After you sign the large stack of papers that the lender puts in front of you at the closing, you probably wonder which of those documents you actually have to keep. There are what seems like hundreds of papers, do you really need all of them cluttering up your home?

While you probably don’t need every document, there are certainly some that you will want to keep, as they can be important to you down the road.

Purchase Contract

You signed a
purchase contract when you agreed to buy your home. This document outlines your rights as well as the rights of the seller. The rights are held up to the letter of the law. This means if the seller doesn’t follow through on promises made in the legally binding contract, you could take legal action against him/her. The same is true if you don’t follow through on your end of the bargain too.

Keeping a copy of the contract handy will help you understand your rights and what you promise to do as the buyer. If you have any questions, you can refer back to the document or use it to show the seller when/if they are not following through on their promises.

Purchase Contract Amendments

If after you sign the contract, you have to put in a few amendments, you should keep a copy of them as well. Many buyers have an amendment after they have the survey, inspection, or appraisal done on the home. If there’s something that they have to renegotiate with the seller or the seller agrees to fix something, it should be put in writing as an amendment to the purchase contract.

Again, keeping these documents at home can help to keep the seller accountable if anything comes up down the road. If at your final walkthrough the seller didn’t’ do as promised, you can request a later closing date. You’ll also want to keep the addendum long after the closing in case anything comes up with the issues the seller was supposed to fix or otherwise care for before you closed on the home.

Seller Disclosures

Sellers are obligated by law to disclose any issues with the home that they know of at the time of the purchase contract. If something comes up down the road that is wrong with the home and it can be pinpointed back to before you bought the home, you can use the seller disclosures to prove that the seller didn’t disclose the issue.

While you don’t want to think of having legal issues after you buy the home, something could come up that could make you want to seek legal action against the seller. If you don’t have proof that the seller
didn’t disclose a major issue, you may not win the case in court.

Closing Disclosure

The Closing Disclosure breaks down all of the fees you pay to get your mortgage. It also discloses the terms and interest rate of your loan. It’s an easy document to come back and reference should you have any questions about your loan’s term, interest rate, or payment.

You can also use the Closing Disclosure at tax time. When you have your tax professional prepare your taxes, you can inquire about writing off any of the closing fees that you paid. While it’s tougher this year to get any deductions outside of the standard deduction, you never know when an expense might be able to be written off on your taxes. This form is the easiest way to prove that you paid the fees.

Mortgage Note

The note will show the name of the lender, the interest rate of the loan, and the amount of money borrowed. It’s a good reference to have should there be any issues down the road. The note can also be proof that you need moving forward if you want to take out a second mortgage or you want to refinance your current loan. Lenders use the note to have concrete proof of your original loan amount and the interest rate you pay.

Mortgage Deed

The mortgage deed is what gets recorded with the county and becomes public record. This is what proves your ownership of the home. Hopefully there aren’t any issues that come about regarding your ownership in the home, but if they do, the mortgage deed would be your best way to prove your ownership, especially if the issue went to court.

Title Insurance Policy

When you take ownership of the home, the lender requires that you purchase lender’s title insurance. You also have the opportunity to buy an owner’s policy. The title insurance policy protects you should anyone come and try to stake a claim in your property.

Again, if the case had to go to court, the
title insurance policy would help prove your case as well as help you cover the cost of the court and lawyer charges.

While it’s best if you keep all of the closing documents you are provided, the above documents are the most important. They can help you during tax time as well as if any issues arise with the home or its ownership in the future.

Sometimes the cost of closing on a home purchase can be overwhelming. Not only do you need money for the down payment, but you need between 3% and 5% of the home’s value for closing costs. If you can’t come up with enough money for everything, you may be able to ask the seller for help with seller concessions.

What are Seller Concessions?

Technically, seller concessions are funds a seller gives you to help you
pay your closing costs. In some cases, though, they are funds that the seller provides to help you cover the cost of repairs. This is a common scenario when something is wrong with the home and the seller doesn’t want to use the time or resources necessary to fix it before the closing.

Before you negotiate seller concessions into your loan contract, learn the maximum amount allowed by each loan program:

Conventional loans – 3% of the purchase price of the home if you put 10% or less down on the home. The amount increases to 6% if you put between 10% and 25% down on the home.

FHA loans – 6% of the purchase price of the home no matter how much you put down on the home

VA loans – 4% of the purchase price of the home plus the cost of reasonable and customary closing costs

USDA loans – 6% of the purchase price of the home

These limits only apply if the appraised value is as much as or higher than the sales price of the home. If you agree to pay more than the price of the home, the limits are calculated based on the value of the home.

Common Seller Concessions to Request

Every situation will differ, but below are some of the most common and reasonable concessions to ask a seller for when buying a home:

Repairs to make the home functional – If there’s something wrong with the electrical system, plumbing, or roof, it’s safe to ask the seller for concessions. This, of course, only applies if the home passes the appraisal. If the appraiser doesn’t think the home is safe, a lender won’t give you a loan for it. If the repairs are something that doesn’t affect the home’s value but may affect your use of the home, though, it’s
reasonable to ask for help with it.

Closing costs – First-time homebuyers are often shocked at the amount of closing costs they have to pay. If it makes the loan unaffordable, a seller may be willing to step in and pay some or all of the closing costs to make the purchase possible for you. It’s a win-win for both sides of the equation.

Discount points – If you are going to stay in the home for the long-term, you may want to ask the seller to pay your discount points, if you don’t have the cash to do so. This will help you get a lower interest rate, which will save you money over the life of the loan.

Real estate taxes – The taxes on a home can be another reason you need an excessive amount of cash at the closing. If the taxes make the house unaffordable because of the combination of closing costs and the down payment, the seller may be able to help.

Keep in mind, seller concessions ultimately increase the price you pay for the home. All sellers have a ‘bottom line’ figure they want for the home. If you ask for concessions, they may agree, but will increase the price of the home accordingly. Of course, they can only increase it as much as the value of the home or they risk your ability to secure financing.

What this means for you is a larger loan amount. You essentially borrow the money that the seller ‘gives’ you. With a higher loan amount, you have a higher mortgage payment and pay more for the loan over its entirety. If this is your ‘forever’ home, though, it may make sense to do so because you’ll be able to afford the costs of closing and/or repairs that make the house a home for you.

If you put less than 20% down on a home, you’ll likely pay mortgage insurance. This insurance protects the lender should you stop making payments on your loan. The insurance will pay the lender back a portion of the amount they lost by repossessing your home.

Just how long do you have to pay this insurance? It depends on the type of mortgage you have.

Conventional Loans and Mortgage Insurance

If you took out a conventional loan, such as a
Fannie Mae loan, you pay what’s called Private Mortgage Insurance. Lenders require you to pay this insurance if you make a down payment of less than 20%. By law, this insurance must be canceled by the lender once you owe less than 78% of the home’s original value, though.

There’s even better news, though. You can request cancelation of the insurance as soon as you owe 80% or less of the home’s current value. This may happen sooner than your original mortgage documents show, but it’s up to you to prove that you do owe less than 80% of the home’s value.

If you follow the original amortization schedule, you will know the exact month that you will be able to request that the lender cancel your PMI. You must request the cancelation in writing. If you know your home appreciated, though, you may request cancelation sooner. Here’s how.

First, you must order a
professional appraisal. While you can likely get an estimated value of your home on sites like Zillow and Redfin, the lender needs solid proof that the home is worth what you say. With a professional appraisal report in hand, you can determine if you owe less than 80% of the home’s new value by dividing the home’s value by the outstanding principal balance on your loan. If it’s less than 80%, you can request cancelation.

Keep in mind, though, that this is up to lender discretion. Some lenders allow you to cancel PMI early if you can prove your home appreciated, while others don’t allow this method. If that’s the case, you must wait until the anticipated date that you will hit an 80% LTV to cancel the insurance.

FHA and USDA Loans and Mortgage Insurance

If you take out a government-backed loan, such as an FHA loan or USDA loan, you’ll also pay mortgage insurance. In fact, you’ll pay mortgage insurance twice with these loans. The first time is at the onset of the loan. You can either pay the insurance upfront at the closing or wrap it into your loan amount.

You’ll then also pay annual mortgage insurance, which is similar to the conventional loan’s PMI. Unlike conventional loans, though, with government-backed loans, you can’t request cancellation of the mortgage insurance. You pay the premiums for as long as you have the loan.

Luckily, your premiums will drop as you pay down your principal balance, but the insurance never goes away. The lender figures your annual mortgage insurance premium based on the average annual balance of your mortgage each year. They then charge you 1/12th of that amount with your mortgage payment each month.

The only way to get out of paying mortgage insurance on a government-backed loan is to refinance out of that loan program. Many borrowers take an FHA loan because of the
low down payment requirements and flexible underwriting guidelines when they first buy a home. Once they are more established and able to qualify for a conventional loan, owing less than 80% of the home’s value, though, they refinance out of the FHA loan. This eliminates the mortgage insurance once and for all.

VA Loans and Mortgage Insurance

The one government-backed loan that doesn’t require mortgage insurance is the VA loan. This program, which is reserved for veterans, requires only a VA funding fee at the onset of the loan. The VA nor the VA approved lenders require mortgage insurance.

The VA does guaranty the loans for the VA approved lenders, though. If a veteran defaults on their loan, the VA pays the lender 25% of the amount lost. This is often much higher than any down payment borrowers make, so it’s a decent risk for lenders to take.

Mortgage insurance is there to help you get a loan with little money down on it. While it seems like yet another pesky fee, it does help you become a homeowner. Without that insurance and/or 20% down on the home, you could find yourself without the home you wanted.

You know you have to verify your income in order to refinance your mortgage. Unless, of course, you qualify for the VA streamline or FHA streamline loan. You aren’t required to verify your income if you use a streamline program.

But just what does it mean to
verify your income? Do you need paystubs, W-2s, and tax returns?

There isn’t a straight answer to this question. It depends on the situation. Some borrowers will have to provide their tax returns, while others won’t need to provide them.

Salaried and Hourly Borrowers

Salaried and hourly borrowers typically don’t have to provide their tax returns when refinancing their mortgage. If you make a yearly salary and it stays the same all year, your lender won’t have a need for your tax returns. Your paystubs and W-2s will show the necessary information for the lender to qualify you for the loan.

Hourly employees are also exempt from providing their tax returns. Hourly employees will have to provide their paystubs covering the last 30 days and their W-2s covering the last 2 years. This way the lender can determine a 2-year average of your income. They do this in the event that your hours vary, which would give you varying income. Taking a 2-year average helps the lender account for the highs and lows that your income may experience.

Borrowers Paid on Commission

If you work on commission and it makes up more than 25% of your income, you will need to provide your tax returns for the last 2 years. Lenders will look at your tax returns to see if you have any unreimbursed employee expenses that they must deduct from your income. They will also look for any deductions that you take that are work-related. Lenders are required to use your
adjusted gross income as it is reported on your tax returns. If you claim many deductions, it could affect your ability to secure a mortgage.

Self-Employed Borrowers

Finally, we have
self-employed borrowers. These borrowers definitely need to provide the last two years of their tax returns. Just like borrowers paid on commission, lenders need to determine the adjusted gross income of the self-employed borrower.

Because the lender will use your AGI as reported on your tax returns, it works to your benefit to avoid taking too many deductions during the 2 years leading up to your loan application. Even though this will increase your tax liability temporarily, it will also increase your chances of securing a mortgage.

Don’t worry if your lender asks for your tax returns. It’s just another way for them to verify your income. As long as your tax returns are legitimate and they reflect what your paystubs and/or W-2s already show, you are in good hands. The lender will use your tax returns to calculate your gross monthly income, which they then use to determine your debt ratio. This is the lender’s way of determining if you can afford the loan and if you are a high risk of default.

A HELOC account, or Home Equity Line of Credit account, is where your money from your second mortgage sits. The HELOC is unique because it does not give you a lump sum of money. For example, let’s say you took out $50,000 as a HELOC. You do not receive that $50,000 at one time. It sits in an account that you can withdraw from. Think of it like a checking account with the rights of a credit card. You can write a check or use a designated ATM card to retrieve the funds, like a checking account. But, you can reuse the funds as you can on a credit card. Once you use funds and pay the back, they are available again. This goes on until your draw period ends.

Paying the Funds Back

Unlike a standard
second mortgage, you only have to pay interest on the funds you borrow. This is the case throughout the draw period. Typically, home equity loans allow you to draw funds for the first 10 years. At the end of those 10 years, you enter the repayment period. At this point, the account closes and you cannot draw funds anymore. The payments you make during the repayment period cover the principal and interest amortized over the rest of the term. This usually means for the next 20 years.

The Interest Rate

The interest rate on a HELOC account also works differently than a standard loan. More often than not, it is a variable interest rate. There are several indexes the rate may coincide with and each loan has its own margin. The lender will tell you the index for your rate as well as the specific margin. The most common index used is the prime rate. This rate can change from month to month. What does not change is your index, though. For example, if your margin is 2%, it remains 2% for the entire draw period. The lender then adds 2% to the prime rate each month to calculate your interest rate.

You should always know the caps on your interest rate. Every lender sets a cap before you close on the loan. This helps limit the amount your
interest rate changes. There is a periodic and lifetime cap. The periodic cap limits how much the rate can change each month. For example, if the cap is 1%, your rate cannot increase or decrease more than 1% any given month. The lifetime cap determines how much the interest rate can increase or decrease over the life of the loan. This cap is usually much higher than the periodic cap.

How to Use a HELOC Account

People use a HELOC account many different ways. The most common is for home improvements. It just makes sense to tap into the equity of your home in order to improve it. You see an instant return on your investment this way. Borrowers who use the funds to fix up their home draw the funds out as they need them. Whether they do the work themselves and need the funds to purchase the supplies or they hire contractors, the money is there to use as they need.

Some people prefer using a HELOC for purchasing a car or paying for a wedding because the rates are often low. Plus, you might be able to write off a portion of the interest you pay on the loan on your taxes. Keep in mind, though, you will not see any return on your investment when you use the funds for something other than your home.

Making Sure you can Afford a HELOC

A HELOC account might seem like a great idea at first. You have funds at your disposal, as you need them. You only need to secure approval once and you can reuse the funds over the next 10 years. However, you should keep in mind that the payments change. If you have fixed income or cannot deal with fluctuating bills, this might not be the right account for you. Look at the worst-case scenario – the highest your rate can go. Can you afford the payment that coincides with that rate? If you cannot see yourself affording that payment, do not take the HELOC as that payment could become reality – there is no way to predict it.

Applying for a HELOC

There are many lenders you can apply for a HELOC with, but starting with your current lender or bank may help. They often provide current customers with a discounted rate in order to keep them coming back. You should also shop around with different lenders, though, so you can see what is available out there. Many lenders have a maximum amount you can borrow as well as a maximum
loan-to-value they allow. In most cases, this equals 85% of the value of your home. Make sure you have the equity and that your credit is in good condition before you apply. A second loan is risky for any lender as it is in second lien position. If you default on your loan in the future, the second lienholder is the last to get paid. They usually do not get paid at all in this case.

If you want a HELOC account, make sure you shop for the most favorable terms. Interest rates are often low to start, but increase over time. Make sure you can afford the payments and that you need the money. If it is for frivolous purchases, rethink your decision. If, however, you want to reinvest in your home in order to make a profit, this can be a very profitable way to make the changes you need. Talk to your lender about your options and apply for your HELOC today.

Do you believe that you need 20% to put down on a home before you can get a mortgage? You aren’t alone, but you are incorrect. There are several loan programs, including a conventional loan, that allows you to buy a home with much less than 20% down on it.

While it’s true that you need 20% down on a home if you want to avoid paying
Private Mortgage Insurance, you can certainly get a loan without that large down payment. In fact, in some cases, it’s wise to avoid making the large down payment. If you don’t have an emergency fund, saving the money in a liquid savings account may be a wiser choice for you in the first place.

Ways to Buy a Home Without 20% Down

So, what are the ways that you can buy a home with less than 20% down? We list them below.

Conventional loans – Many conventional lenders require just 5% of the purchase price of the home to get conventional financing. With this low down payment, you will pay Private Mortgage Insurance, which can add between $30 – $150 to your payment depending on the size of your mortgage.

FHA loans – You only need 3.5% down on an FHA loan. You don’t need to be a first-time homebuyer as many people believe to secure this loan either. Anyone with a credit score of at least 580, debt ratios around 31/43, and stable employment may qualify. The FHA also allows borrowers to receive 100% of the down payment as gift funds. All FHA borrowers pay Mortgage Insurance for the life of the loan. Right now, borrowers pay 0.85% of the average outstanding principal balance of the loan.

VA loans – If you are a veteran that served at least 90 days during wartime or 181 days during peacetime, you may secure 100% financing for the purchase of a home. This means
no money down on a home with a flexible financing program. The VA loan doesn’t require any type of mortgage insurance either. You just pay an upfront funding fee to the VA.

USDA loans – If you prefer rural living to city life, you may benefit from the USDA program. This loan also provides 100% financing. In order to qualify, your total household income must not exceed 115% of the average income for the area. The USDA does charge annual mortgage insurance, but it’s only 0.35% of the outstanding loan amount.

What’s the Benefit of a 20% Down Payment?

If there are so many programs that allow you to put down less than 20% on a home, why would you want to put 20% down? There are a few simple reasons.

You may have an easier time securing a mortgage approval. The more of your own money that you have invested in a home, the more likely a lender is to approve you for it. The higher down payment can offset a low credit score or
high debt ratio, both of which are often risk factors that make lenders turn applicants down.

You may get a lower interest rate. The more money you invest in a home, the less risk the lender takes. Because lenders choose interest rates based on the risk that you pose, you may be able to secure that low interest rate you wanted for your mortgage.

You’ll have a smaller mortgage payment. The less money you borrow, the smaller your payment becomes. Who wouldn’t want a smaller monthly payment? You won’t’ have to worry about mortgage insurance. Your payment will be principal, interest, real estate taxes, and homeowner’s insurance.

You’ll build equity in the home faster. The first few years that you make mortgage payments, you will pay mostly interest on your payments. This means you touch the principal balance very little. This means you gain very little equity in the home. If you make a large down payment, though, you’ll have instant equity in the home.

Keep in mind, though, as we talked about above, it doesn’t always make sense to make the large down payment. If it is going to put you in a financial bind, you are better off keeping the money in a liquid account for financial emergencies.

It also may not make sense to put a lot of money down if you don’t plan to stay in the home for the long-term. If you know you will move in a few years, you won’t pay a lot of interest on the money you borrow, which allows you to keep your money liquid for the purchase of your next home when you do move.

Whether or not it makes sense for you to put 20% down on a home depends on your situation. Talk to a few lenders and get quotes for a variety of situations with and without a 20% down payment. This will help you decide which program would work the best for you.

One major factor in your ability to secure a mortgage is your income. You must show lenders that you can afford the mortgage as well as your other monthly debts and still have money left at the end of the month. Lenders need to make sure beyond a reasonable doubt that you can
afford the mortgage before they can allow you to sign on the dotted line.

Just how do you prove your income? It depends on the type that you earn. For example, if you work on commission and it totals more than 25% of your total income, the lender will need your tax returns. If your income is just a base salary or is made up of less than 25% commission and/or bonuses payslips will work.

Covering 30 Days

Your payslips must cover at least the last 30 days. Lenders use these documents to make sure your income adds up to what you say you make. It’s not enough to say that you make $60,000 per year. You have to prove it. Even if you provide your tax returns for other purposes, you must show lenders that your year-to-date income is on par with what your tax returns show.

Because you only need to cover the last 30 days, the number of payslips you must provide will vary based on your pay schedule:

Paystubs Before the Closing

Some lenders may also make you provide a paystub right before the closing. This reconfirms the fact that you are still employed. This is common practice when a lot of time passes between the application and the closing. If it’s a matter of a few months, lenders must confirm that you are still employed. Some lenders just conduct a verbal
verification of employment, but others may require another payslip.

The Other Income Documents

Your payslips aren’t the only income documentation lenders will require. Along with seeing your current income, they also need proof of your past income. If you make a base salary or don’t work on commission, you can provide your last two years of W-2s. These documents will show lenders your salary over the last two years.

If you work on commission or bonuses, the lender may request your W-2s a well as your tax returns. This gives them a chance to determine if you have any unreimbursed expenses that coincide with your employment. If so, the lender will deduct those expenses from your income for qualifying purposes.

This is all in addition to your paystubs. Lenders use the W-2s or tax returns to see your pattern of income. They want to make sure your income either stayed stable or increased over the last 2 years. The payslips will then confirm that you are on the same path this year as your W-2s or tax returns show.

The lender will likely ask for your payslips when they
pre-approve you for a loan. They look at paystubs first and then ask for further documentation if necessary. Have your payslips ready when you know you want to apply for a loan so that you can get the process right away.

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IMPORTANT MORTGAGE DISCLOSURES:

When inquiring about a mortgage on this site, this is not a mortgage application. Upon the completion of your inquiry, we will work hard to match you with a lender who may assist you with a mortgage application and provide mortgage product eligibility requirements for your individual situation.

Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit
rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.